Beware Sending a Real Estate Deal Off the Rails

An
interesting decision from Toronto’s small claims court last December
provides a useful lesson on the obligations of buyers, sellers and
lawyers when a real estate transaction starts to go off the rails.

In his decision,
Justice M. Donald Godfrey wrote that the case came to court because the
parties and their lawyers were unable to work out a “reasonable
compromise” on the closing of a transaction on Mould Ave., in Toronto.

Nuno Barbosa and Paula
Boas agreed to buy the house for $516,000 from Helder and Maria
Rodriguez, with a scheduled closing of October 30, 2009. Two days before
closing, the buyers discovered that the property taxes were not $2,300
as indicated on the MLS listing but were in fact almost $4,600. The
increase was the result of a re-assessment of taxes due to an addition
to the property which was completed in early 2008.

The buyers requested a
$10,000 price reduction. When the sellers declined the offer, the
buyers refused to close even though their lawyer was holding enough
trust funds to complete the transaction.

After receiving advice
from another lawyer, the buyers changed their minds and told their
lawyer that they were willing to close and sue later. But the request
was not made until after the 6 p.m. closing deadline.

The sellers did not
agree since they did not know what damages they were exposed to as a
result of two “chain reaction” closings, which depended on the sale of
their Mould Avenue house.

The buyers then sued
the sellers for return of their $10,000 deposit, and the sellers sued
the buyers for damages resulting from their refusal to close. 

After an unusually
long three-day trial, Justice Godfrey ruled that the buyers should have
closed the transaction on time since the breach of contract was “not
material.” However, the judge also decided that the sellers were
entitled to refuse to close 15 minutes after the 6 p.m. deadline because
the contract stated that time was “of the essence.”

The sellers could keep
the $10,000 deposit, but were awarded no additional damages since they
did not take reasonable steps to limit their losses. Although their
legal position in refusing a price reduction was technically correct,
they were exposing all parties to the risk of subsequent litigation.

“The vendors knew or
ought to have known,” the judge wrote, “that they were obliged to
compensate the purchasers for the misrepresentation on the taxes if the
purchasers were forced to close.” The judge felt that the $10,000
reduction offer “certainly appears to be a reasonable attempt to
estimate (the purchasers’) potential loss,” and the sellers were
“negligent in absolutely refusing the $10,000 abatement.”

They “could and should
have at least made a counter offer” to hold back the money and
establish the proper damages after closing.

Three days after the
scheduled closing, a further attempt to close failed. The sellers
offered to close if the buyers agreed not to sue them afterward, and the
buyers insisted on retaining their right to sue for damages as a result
of misrepresentation of the taxes.

On this point, “the
vendors were not acting reasonably,” the judge wrote, since “there was
no question that the purchasers would be entitled to some compensation
for the misrepresentation of the taxes.”

In the end, “both sides acted unreasonably” in not enabling the transaction to close.

Even though the
purchasers lost their deposit, the sellers were unsuccessful in
recovering their almost $27,000 in losses on their own purchase when
they failed to limit their damages. The sellers also had to pay their
realtors $3,750 in costs when the case against them was dismissed.

The lesson to be learned from this sad case is that any real estate transaction carries the risk of going off the rails.

If that happens, it is
critical that all parties act reasonably and get solid legal advice on
the risks involved, so that damages can be minimized and the possibility
of an ugly court case is avoided.

Often, in litigation, nobody wins.